The mental cost of money worries; Thrift requires mental effort, itself a scarce resource, and resesarchers set out to investigate whether their preoccupation with money leaves the poor with less mental bandwidth for other tasks

August 28, 2013 5:15 pm

The mental cost of money worries

By Mark Vandevelde

Poor people are disproportionately likely to make bad decisions, such as taking out loans they cannot repay, eating unhealthily and dropping out of class. It is sometimes said that such people are authors of their own misfortune. Send­hil Mullainathan, a Harvard economist, and Eldar Shafir, a Princeton psychologist, have a different view. They argue that lousy decisions are an effect of poverty as well as a cause. The mindset that produces them, they say, is triggered by scarcity of all kinds – warping the decisions of busy professionals who are short of time, lonely hearts who want for social contact and dieters who must ration their calories, as well as the poor.Scarcity is everywhere, yet we are often blind to it. To misquote For­rest Gump, life is like a newly opened box of chocolates: you begin to eat, yet your supply seems undiminished until it is almost gone. Only then do you eke it out, weighing the attractions of a morning treat against an afternoon sugar rush. Intellectually, you never thought the chocolates would last forever, yet you behaved as though you did not perceive the scarcity until you neared the bottom of the box.

It is when we do not have enough to meet our immediate needs that we are most likely to compute the trade-offs that are implicit in our choices. When Mullainathan and Shafir interviewed well-heeled commuters, they found them more willing to travel the extra miles to a distant shop to save $50 on a $100 purchase than to travel the same extra distance to save the same amount on a purchase worth $500 – even though the costs and benefits are the same. When they visited a soup kitchen, their respondents were savvier. They conclude that the poor, who are used to making painful trade-offs, “are experts in the value of money” and “less prone to [such] inconsistencies”.

However, this expertise may come at a cost. Thrift requires mental effort, itself a scarce resource, and the authors set out to investigate whether their preoccupation with money leaves the poor with less mental bandwidth for other tasks. They found that hard-up shoppers performed worse on standard intelligence tests when they were first asked about a hypothetical financial dilemma involving a loss of $1,500 than when confronted with a smaller loss of $150. Rich shoppers did just as well after considering either dilemma. “Our study revealed that simply raising monetary concerns for the poor erodes cognitive performance even more than being seriously sleep deprived,” they say. Some readers, though, will be wary of concluding too much from IQ tests, which are notoriously unreliable indicators of real-life mental agility.

Yet there is a more visible toll on the mental lives of the poor. Spending on essentials must be cut, large expenditures foreseen and saved for and impulse purchases resisted. The authors show how difficult it is to sustain this juggling act for long enough to escape poverty. Working in India, they paid off the debts of hundreds of street vendors and followed them for a year. For a time, they report, “it looked as if they now saw the hazards in the debt trap and persisted in staying out of it.” But, one by one, the vendors were felled, “fall[ing] back into the scarcity trap because she did not have enough slack in her budget to weather the shocks she faces”.

The authors are least convincing when they reach beyond poverty for more general conclusions – for example, assimilating loneliness into the analysis under the guise of “social scarcity”. The predicaments of a cash-poor Indian street trader and a time-poor chief executive are probably less similar than they allow. At the core of the book, however, is an enlightened account of how poverty begets poverty, which should inspire new ideas about how to release people from it.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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